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WarrenBuffet'sWednesdayMoneyFromHeaven

From: FOREEconomy&FinanceForum<fef@fsm.ac.in>

Wed,Sep21,201603:22PM

Subject: WarrenBuffet'sWednesdayMoneyFromHeaven
To: FMG24<fmg24@fsm.ac.in>,FMG25
<fmg25@fsm.ac.in>,IMG9<img9@fsm.ac.in>,
IMG10<img10@fsm.ac.in>
Cc: SumeetKaur<skaur@fsm.ac.in>,Dr.Himanshu
Joshi<himanshu@fsm.ac.in>,Presidentstudents
council<president_studentscouncil@fsm.ac.in>,
VicePresidentStudentscouncil<vice
president_studentscouncil@fsm.ac.in>
GREETINGSFROMTEAMFEFF!
HELICOPTERMONEY:MONEYFROMTHEHEAVEN

Inflationisbelowtargetinmostoftheworld'smajordevelopedeconomies.With
interestratesatrecordlowsandeconomistsstillsplitontheeffectsofquantitative
easing,helicoptermoneyhasbeentoutedasapossibleweaponincentralbanks'
arsenals.
TheIdea

The18thcenturyphilosopherDavidHumeaskedwhatwouldhappenifsomegood
fairywentarounddoublingthemoneyineverybodyspockets.Noonewouldreally
bericher,heconcluded,becausepriceswoulddouble.
ThethoughtexperimentwastakenfurtherbyNobellaureateMiltonFriedmanin1969,
whenhereplacedthefairywithahelicopter.
InthenowfamouspaperTheoptimumquantityofmoney,friedmanincluded
followingparable:
Letussupposenowthatonedayahelicopterfliesoverthiscommunityand
dropsanadditional$1000inbillsfromsky,whichisofcourse,hastilycollected
bythemembersofthecommunity.Letussupposefurtherthateveryoneis
convincedthatthisisauniqueeventwhichwillneverberepeated.

Theentirepurposeofthisistofreelydistributemoneytothepublicsothattheycould
spendmoreandinflationagainbecomesthetargetofCentralBank.Thequestion
whichwillhavecometoyourmindnowishowincreasedspendingcanmake
inflationthetargetofcentralbank.Higherspendingwouldincreasethedemandin
themarketfordifferentproducts.Howeverduetostructuralproblemssuppliersare
notabletosupplywiththatpaceoreveniftheyareabletosupplytheydeliberately

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holdtheirsuppliessoastoincreasethepricesoftheirproductsinthemarketsoasto
makemoreprofit.
WhyhastheconceptofHelicopterMoneybecomerelevantnow?
CentralBanksofDevelopedeconomieslikeUS,UKandJapanarecontinuously
followingtheapproachofQuantitativeeasing.Nowyouallmustbethinkingthat
whatthisactuallymeans.QuantitativeeasingisanapproachunderwhichCentral
bankofcountryprintsnewcurrencynotes,itthenpurchasesbondsofvarious
financialinstitutionsusingthosecurrencynotes.Purchasingbondsfromthese
financialinstitutionsincreasesmoneysupplywiththeseinstitutionsandthustheyare
abletolendmoremoneytopublic.Ultimatelyitincreasesthemoneysupplyinhands
ofgeneralpublicandwhichthengetsconvertedintodemandforvarious
products.Thisapproachismainlyfollowedbythosecountrieswhereconsumptionhas
gonetoaverylowlevel.

SomeofyoumustbewonderingthenwhatisdifferencebetweenQuantitative
easingandHelicoptermoney.

Bothhavetheultimatepurposeofincreasingthedemandintheeconomyby
increasingthemoneysupplyinhandsofpublic.
Quantitativeeasingleadstoinflationofassetpricesoffinancialinstitutionsfrom
whomCentralbankshaspurchasedbondsinbulk.WhileincaseofHelicoptermoney
thereisassuchnoincreasesinpricesofassets.Itseekstopromoteeconomic
recoverybydirectlystimulatingtheaggregatedemandratherthanworkingindirectly
throughassetpriceinflation.
Thebiggestdifferenceariseswhenitcomesagaintotightenthepolicy.Incaseof
QuantitativeeasingtheCentralbankcansellthoseassetsinordertoagainget
backthemoneyfromthemarket.WhileincaseofHelicoptermoneybankshave
toraiseshortterminterestrates.
ThedisadvantagesofHelicoptermoneyisthatmoneydroppingmaytear
Centralbanksbalancesheetsandmakethosebanksunprofitableforsometime.
ItmayalsoleadtoHyperinflationandmayhindertheCentralbankabilityto
useinterestratesastoolforconductingtheconventionalmonetarypolicy.The
coordinationbetweenfiscalandmonetarypolicywillalsobecomeanmajor
issue.
ThebiggestquestioninfrontofallcentralbankersoftheworldisthatwhetherHelicoptermoney
canreallygivewingstotheeconomieswherecentralbankersareplanningtointroduce?
Weaskthesamequestiontoyouandurgeyoutogiveitathoughtforjustaminute........

Regards
KanakMethi
TeamFEFF

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